January Pleasanton Real Estate Market Update

Pleasanton real estate experienced typical market conditions in December.  Inventory and pending sales both lower, and prices soft but fairly steady.  The one thing that housing industry experts were hoping Santa would deliver is lower mortgage rates.  But apparently Santa has little to no impact on macro-economic trends in the US economy.

Speaking of interest rates… Average 30 year fixed mortgage rates rose again in December, to an average of 6.91%.  This is up from the the 12 month low of 6.08% at the end of September of 2024, and close to the 12 month high of 7.22% in May of 2024. 

This in spite of, or because of, the Federal Reserve lowering the Federal Funds Rate 3 times from 5.5% to 4.5%.  In fact, if you look at the chart, mortgage rates have moved in the exact opposite direction of the federal funds rate

How can this be?  The Federal Government and the Federal Reserve controls the Federal Funds Rate, the key benchmark rate that rate that impacts what banks charge for consumer and commercial short term loans.  In contrast, the mortgage market is set by investors and the yield they will accept for long term loans.  The inflation environment and economic outlook drives the interest rates (the yield investors are willing to accept) for long term instruments, including US treasuries and mortgage rates.  Mortgage rates are market driven, not dictated by the Federal Government.

The simple explanation is that investors are fearful of inflation, which has eased in the last few months but remains above the Federal Reserve’s target of 2%.  Inflation has proven to be stubborn and volatile.  Trends in economic data such as jobs reports, unemployment, CPI (consumer price index), PPI (producer price index), GDP (gross domestic product), and others indicate the strength of the economy and the outlook for inflation.  These are the 2 critical factors that impact the bond market, and by extension, the mortgage market.

Investors are skittish about the Fed reducing the federal funds rate if inflation is not under control, fearing that the rate reduction could heat up the economy and add to inflationary concerns.  As a result, investors are demanding higher yields (interest rates) to offset expected inflation. 

Simply put, mortgage rates are a critical factor in the housing market for 2025.  Demand for housing has remained strong, although higher rates erode a buyer’s purchasing power and adds to uncertainty.  No one expects long term mortgage rates to return to the artificially low 3% range of the pandemic.  But a return to historically normal rates in the 5% range would certainly help the housing market.  As always we will see…